Some-Buyer's Stamp Duty30th October 2012

First it was the "HK land for HK Permanent
Residents" policy on new residential land leases. Now the Government is
proposing a discriminatory form of taxation - a "Buyer's Stamp Duty" of 15%
on any person who is not a Permanent Resident (PR) and buys a
home in HK. That is a status that most new arrivals can only get after 7 years
of residency.

This marks a dangerous precedent - for the first time, the amount of tax you
pay depends on your immigration status in Hong Kong. You can come here to work,
and you must then pay salaries tax, but you can't spend your earnings on a home
without paying more tax than the permanent resident sitting next to you. If the
proposal is passed, then it lays the path for other possible discriminatory
taxes - for example, the Government might propose that non-Permanent Residents
pay salaries tax at higher rates, claiming that they are "taking jobs" from PRs,
or they might charge higher stamp duty on tenancies with non-PR tenants, because
they are putting upward pressure on rents for apartments that PRs might rent.

This is at odds with the often-stated Government goal of social harmony and
its calls for
Acceptance of New Arrivals in HK. The video opens with "No matter where we
came from, or how long we've been here, we are all part of the Hong Kong
family". Yeah, right. By telling PRs that they are special, the Government
strengthens the "them and us" mentality. And yet, if you are a "foreigner" like
Google, and want 2.7 hectares of cheap land for a data centre,
creating fewer than 10 permanent jobs per hectare (25 in all), then no
problem! At a plot ratio of 5, a site of that area could produce 135,000
sq.m. (1.45m sq ft) of floor area, or about 2,400 homes. Google paid about
HK$102.6m for the site, assuming they sealed the deal after
premiums went up on
24-Aug-2011. A residential site of that size in Tseung Kwan O would cost about $4k per sq ft of
floor area, or around HK$5,800m. Have we got our priorities right? Anyone for a
new industrial estate, Cyberport, or Science Park?

Another possible discriminatory tax would be a selective sales tax on all
things, not just apartments, to deter mainlanders from crowding into our shops
and buying things to take home. We could have a sales tax for which PRs (on
production of their ID card) are exempt, but non-permanent residents (who have
no vote) and non-ID card holders pay, let's say (picking a number out of thin
air), 15%?

Who are they trying to protect?

Ironically, by erecting a prohibitive barrier to home ownership by non-PRs,
the new tax will ensure that when the bubble bursts, fewer non-permanent
residents, and more PRs, will lose money. It's the Government's way of saying to
non-PRs, "beware of our property market" while encouraging locals to believe
that the market is "healthy and stable" for them. But surely buying property is
a mistake that anyone should be allowed to make for themselves. Meanwhile, if
you are a PR who owns property, the only real way out is now to sell to another
PR.

The Basic Law

Through BSD, the Government proposes, in effect, to prohibit anyone
other than a PR from buying your property. Shouldn't you be free to sell to
whomever you like? After all, it is your property, isn't it? Article 105 of the
Basic Law says in part:

"The [HKSAR] shall, in accordance with law, protect the right
of individuals and legal persons to the acquisition,
use, disposal and inheritance of property..."
(emphasis added)

That is "property" in the legal sense of the word, including immovable
property, i.e. real estate. The "legal persons" phrase is in there to be
specific that the Basic Law protects not just individuals (humans), but also
companies, partnerships and other organisations, and it doesn't say "HK passport
holders", or even "permanent residents", it says "individuals". Yes, it says "in
accordance with law" (meaning common law and local legislation), but when you
start making unequal laws that financially favour one class of individual over
another based on their immigration status, and favouring that class over "legal
persons", then you are on very shaky ground.

The Government may argue that this is not a prohibition, merely a financial
deterrent - well alright then, at what level of duty does it become at least
partially prohibitive? How about 20%, 100%, or 1,000%? The Government may also
argue that BSD falls within its power of taxation under Article 108 of the Basic
Law. That says:

"The [HKSAR] shall...enact laws on its own concerning types of
taxes, tax rates, tax reductions, allowances and exemptions, and other matters
of taxation."

But there is a thin line between taxation and penalty. Penalties are for the
courts to impose, subject to a fair trial, and a penalty which restricts a Basic
Law right would surely be unconstitutional. It would be one thing to deter all
purchases, as a matter of (ill-conceived) policy, by charging very high rates of stamp duty (we
already do some of that, by charging up to 4.25% on all residential
transactions, a measure introduced in the 2010 budget). But to do this only when
the buyer is a non-permanent resident or a company, raising the charge to
19.25%, seems a lot more like a penalty than a legitimate form of taxation. Is
there really a policy objective that can turn this into a legitimate tax, or
just a political desire to be popular with voters, who are all PRs?

Bubble? What bubble?

As usual, the Government speaks of "maintaining a healthy, stable property
market" - but to maintain something, it has to be there already. If it is
healthy and stable, then why do they think these measures are needed? They
cannot bring themselves to admit that we are in a bubble. Instead they say "the
risk of a property bubble forming is increasing". In fact, the phrases
"healthy and stable" and "risk of a
property bubble" in Government press releases goes back at least 32 months to
the
budget speech of 24-Feb-2010, and
prices are up
about 40-50% since then.

The main cause of this is record low, and persistently low, interest rates,
not demand from foreigners (for which, read, "mainlanders"). As Financial
Secretary John Tsang said on Friday, the proportion of residential property
transactions by "non-local" buyers was only 6.5% in 2011. The
current Chief Executive, C Y Leung, was quoted in a
Government press release on 19-Jun-2012 (only 4 months ago):

"He said that although non-Hong Kong residents are
still coming to the city to purchase properties, they are not doing so in
numbers that affect resident Hong Kong buyers."

If anything, there has been a downtrend in such activity since the
mainland economy began to cool. So the Government has failed to demonstrate any
policy objective for this taxation. And note that the original plans in Mr
Leung's manifesto related to HK land for all residents, not just PRs - but then
he remembered that only PRs have a vote.

Waving his hands in the general direction of the sky, Mr Tsang said on
Friday:

"this [BSD] is an extraordinary measure introduced under
exceptional circumstances. We shall consider withdrawing this measure when the
market regains its balance"

"Regains its balance" - what on earth does that mean? When the market has
fallen enough? When it stops going up? When it stops going down? How can a
market be imbalanced and yet "healthy and stable"? In economic terms, the market
is always "balanced" at a price which reflects supply and demand - so he can
only mean that he wants to reduce demand and shift the price downwards.

Killing the redevelopment market

If BSD takes effect, or until LegCo rejects the necessary legislation,
redevelopment of residential buildings (other than by existing owners of whole
buildings) will grind to a halt, because companies who would normally buy up old
apartments and consolidate them for redevelopment will now face a prohibitive
15% purchase tax. That is bound to have a negative impact on supply in about 3
years' time, offsetting some of the supply increases that the Government has
introduced. Perhaps the Government will seek to introduce a BSD rebate scheme
for redevelopers - but that would be controversial in itself. How do you define
a redeveloper? How quickly must they redevelop a site to qualify for BSD
exemption or rebate?

Even if a rebate scheme existed, a developer embarking on a consolidation
project would have to pay the BSD on each purchase and take the risk that it
cannot get 100% ownership. Then the developer would have paid all that BSD
without being able to recover it. The developer might get to the 80% or 90%
threshold at which (depending on the building age) they can trigger an auction
of the site under the
Land (Compulsory
Sale for Redevelopment) Ordinance, but then they would take the risk that a
second developer would win the auction and the first one would have no rebate of
the BSD. On the other hand, if there is no BSD exemption for bidders in such an
auction, then third-party bidders would be hopelessly uncompetitive unless they
could get credit for the BSD already paid by the majority owner. It would result
in single-bid auctions by the majority owner, disadvantaging the minority owners
in the auction.

All of this would leave the Government's
Urban Renewal Authority in an even
more dominant position in the redevelopment market - not only because of its
existing statutory powers of compulsory purchase (which are not subject to any
ownership threshold) but because any stamp duty it has to pay to buy out owners
of old buildings goes straight back to the URA's owner, the Government, so the
URA in essence is exempt from stamp duty. This takes the redevelopment market
even further away from free-market principles.

SSD 2.0

We won't spend much time repeating our criticism of Special Stamp Duty (SSD).
It is unconstitutional because it penalises
owners who sell their properties within a certain time frame, in other words,
for exercising their right of disposition of property under Basic Law Article
105, and it doesn't fall within Article 108 because it is not a legitimate form
of taxation. It is not a legitimate tax because its stated purpose is to inhibit
a form of behaviour without demonstrating that this behaviour harms society
(unlike, say, the public cost of treating cigarette-related illnesses and the
associated lost productivity), and because even if it could be shown that
investing or trading in properties is bad (rather than good) for society, the
tax is unfocussed and hits too many people who could not by any stretch be
called speculators.

Now, by moving the cut-off from 2 years to 3 years, and doubling the rate
from 5% to 10% for resales after 1 year, the SSD is bound to capture even more
unintended victims. How many people, other than civil servants who implement
such policies, could be sure of having an income in 3 years time, with which to
pay their mortgage? Watch as the law catches more people who have only ever
owned one home at a time, but now need to sell, for whatever reason - job
relocation, divorce, death of an income-producing spouse or just the knowledge
(when it happens) that the market is heading down and they are headed for
negative equity. There is an SSD exemption for bankruptcy and foreclosure - but
that's a
Catch-22. Either take the SSD hit, or wait for the bank to foreclose -
either way, the homeowner faces financial ruin.

And by the way, even though Mr Tsang says that "resale within 12 months has
virtually disappeared", he is increasing the rates on that from 15% to 20% (on
resales within 6 months) and from 10% to 15% (within 6-12 months). Like putting
a few more bullets in the corpse. What does he expect to achieve from this,
other than looking tough? He also cites statistics on resales within 12-24
months, noting that they have increased from 83 cases in Mar-2012 to 218 cases
in Sep-2012. That's about 0.02%, or 1 in 5,000 private-sector homes per month.
Hardly a menace to society.

SSD 2.0 only applies to transactions after last Friday. We'll bet him a can
of Pringles that if he gets legislative approval for SSD 2.0 then he (or his
successor) will have to repeal it within the next 3 years.

Important notice: All material on this site, except
where otherwise accredited, is copyright to Webb-site.com.
Media and researchers are welcome to quote from articles on this site, provided that such
quotation is attributed to Webb-site.com. The
information in this site should not be relied upon by any person in making any investment
decision. No responsibility or liability is accepted by Webb-site.com or any person
related to it for any loss arising from or in reliance upon the whole or any part of the
contents of this site. Persons who are in any doubt about an investment or potential
investment should take professional investment advice. From time to time parties associated with Webb-site.com may
own long or short positions in securities issued by or related to companies or governments
on which we comment.